"We have now grown used to the idea that most ordinary or
natural growth processes (the growth of organisms, or popu-
lations of organisms or, for example, of cities) is not merely
limited, but self-limited, i.e. is slowed down or eventually
brought to a standstill as a consequence of the act of growth
itself. For one reason or another, but always for some reason,
organisms cannot grow indefinitely, just as beyond a certain level
of size or density a population defeats its own capacity for further
growth."

Sir Peter Medawar, The Revolution of Hope

"A business firm grows and attains great strength, and afterwards perhaps
stagnates and decays; and at the turning point there is a balancing or
equilibrium of the forces of life and decay. And as we reach to the higher
stages of our work, we shall need ever more and more to think of economic
forces as those which make a young man grow in strength until he reaches his
prime; after which he gradually becomes stiff and inactive, till at last he sinks
to make room for other and more vigorous life."

Alfred Marshall, Principals of Economics (1890)

"Though Keynes's 'breakdown theory is quite different from Marx's, it has an
important feature in common with the latter: in both theories, the breakdown is
motivated by causes inherent to the working of the economic engine, not by
the action of factors external to it."

Joseph Schumpeter, Ten Great Economists

In this paper I shall address two major issues. Firstly, I shall discuss the implications for economic theory of a conception of economic laws widely at variance with the empiricist and/or positivist account of what laws are, how they are discovered, and how they are related to theory. At the same time, I will reject one cornerstone of anti-positivist thought, namely the idea that one cannot provide an account of laws that is fundamentally the same for the natural and the social sciences. Thus, I shall argue that an anti-positivist account of laws is entirely compatible with a conception of scientific laws that applies to both the "hard" (natural) and the "soft" (social) sciences. I shall defend this position by showing its application to economics and economic laws. In doing so, I will compare and contrast both natural-scientific (primarily physical) laws and social-scientific (primarily economic) laws. Secondly, I will argue that perhaps the most significant economic law descriptive of mature capitalism is the law of secular stagnation. The latter states that it is the natural tendency of a developed, industrialized capitalist economy to default to a state of chronic excess capacity and underconsumption. And this is itself a result of the tendency in advanced capitalism for the economic surplus (roughly, the difference between the Gross Domectic Product and the cost of producing the GDP) to grow at a rate more rapid than the growth of profitable industrial investment opportunities. In the course of my discussion I will use the United States as a paradigm case, Much as Marx attempted to identify the underlying features of the accumulation process by reference to England during the Industrial Revulution.

This has in fact been the state of global capital since the end of the "Golden Age" and the commencement of the age of globalized Reaganism/Thatcherism, i.e. the Age of Neoliberalism. I date the transition as commencing in 1973, the last year of post-War Keynesian growth rates in the USA. In fact, I will argue, neoliberal economic policy exacerbates capitalism'a tendency to stagnation.
Let me begin with an account of economic laws.

LAWS, GENERATIVE MECHANISMS AND TENDENCIES

On the Humean or radical empiricist (positivist) account of laws, the latter are descriptions of observed regularities. Presumably, the scientist observes a "constant conjunction" of different kinds of happening, and infers from the regularity of the conjunction that the latter could not be merely accidental, and so concludes that the observed pattern of regularities must be nomological or law-like. 'Sodium chloride dissolves in water' and 'Metal expands when heated' would be simple examples of the results of this account of how laws of nature are discovered.

That this empiricist account is flawed becomes evident when we consider full-fledged laws of a genuine natural science, e.g. physics. I emphasize that laws are components of theories, which themselves are constitutive of established scientific disciplines, such as physics, chemistry, and biology. In fact, the two "laws" mentioned at the end of the preceding paragraph are not laws of physics at all. Among the genuine laws of physics is, e.g., 'Falling bodies near the surface of the earth accelerate at a constant rate.' This law is certainly not established by the observation of repeated conjunctions of events. On the contrary, actually observed falling bodies in "open systems", that is, in the circumstances of everyday life, conspicuously fail to conform to this law. Yet this is not taken to refute the law. For the law describes the behavior of bodies in a vacuum, that is to say, in a "closed system", one created by the scientist, typically in a laboratory situation. Philosophers of science have tended to ignore the distinction between regularities observed only in closed systems, and conjunctions observed in everyday life, which, as such, have no value as contributions to scientific knowledge. These philosophers have, accordingly, written as if the regularities in question were features of open systems, of nature. This confusion impedes our understanding of all types of laws, from physical to economic.

This failure –until relatively recently- of philosophers of science to properly attend to the importance of laboratory work in the acquisition of scientific knowledge is due to the fact that these philosophers have focused almost exclusively on science as established theory, i.e. as a way of representing the world. They had ignored how these theories were actually established. That is, they paid little attention to experiment, which is a way of intervening in the world. This inattention to what happens in closed systems created in the laboratory led thinkers to miss the importance of the concept of tendencies or dispositions in grasping the concept of a law of science. Let us dwell on this point and its relation to economic laws.

It is not that our knowledge of natural laws is not based on observed regularities. The point, rather, is that these regularities are not found in nature. They are found in closed systems, elaborately designed experimental circumstances found in laboratories. Yet, we correctly believe that what we learn in experimental situations gives us knowledge that is not confined to these situations. We believe that what we learn from observations of repeated patterns in experiments gives us not only knowledge of the behavior of objects in laboratory circumstances, but also knowledge of these same (kinds of) objects as they behave in nature, in the open systems of everyday life. But scientifically significant repeated patterns are not found in the world of daily life. This raises profound epistemological and ontological questions.

The most significant epistemological question arises from the following consideration: Were it not for the intervention of the experimenter, closed-system regularities would not obtain. Hence, the experimenter is a causal agent of the pattern of regularities observed in the laboratory. It is these contrived conjunctions which we invoke to justify our belief in (usually causal) laws. And while these regularities are the (partial) result of the intervention of the experimenter, we do not believe that the experimenter in any way originates the laws whose existence is attested to by the contrived regularities. The question therefore arises: What justifies our (correct) belief that knowledge obtained in closed laboratory systems designed by an agent applies also in open systems, i.e. in nature, which of course is not designed by scientists and does not evidence the regularities found under designed experimental circumstances?

I want to suggest that this question comes to the same as the following question: What must nature be like, and what must experiment reveal, in order for experimental knowledge to be able to be legitimately extended to the world outside of the laboratory, i.e. to nature? Note that this is a Realist question: it asks what we must presuppose about the constitution of the world in order that our experimentally-based scientific beliefs be justified. This is the precise Realist counterpart to Kant's Idealist question: What must we presoppose our minds –as opposed to nature or the world- to be like in order for scientific knowledge to be possible? I will argue that the answer to our Realist question provides the conceptual resources to elucidate the general nature of economic laws and economic theory, and the nature of the subject matter investigated by economists.

I will argue that since we believe that what we learn by experimental observation justifies our claim to knowledge of the experimental objects as they behave in nature, we must assume that these objects possess natural structures, similar to what Aristotle and the scholastics called "natures" or "essences." A natural structure must be conceived as what Critical Realists call a generative mechanism (hereafter, GM). The latter is a specific mode of material organization. What GMs generate are tendencies or dispositions to behave in characteristic ways. The statement that a physical thing or a social institution or structure tends to generate characteristic regularities is a statement of a law. The natural structure of salt, expressed in chemistry as HCl, is such that when it is mixed with water, whose natural structure or organization is expressed as H2O, it tends to dissolve. Gases tend to expand when heated and falling bodies near the surface of the earth tend to accelerate at a constant rate. These are statements of chemical and physical laws. We shall see that precisely the same kind of analysis can be made of laws in economics.

Tendencies are not the same as trends. The latter are merely observed regularities; there need be no implication that an underlying structural feature of the thing in question generates the regularity. This feature of laws is reflected in ordinary language in non-scientific contexts: we might say "He has a tendency to exaggerate." We mean that a disposition to exaggerate is a natural expression of his underlying character. We do not usually mean that he exaggerates whenever it is possible for him to exaggerate. This is part of the meaning of 'tendency.' Thus, tendencies can exist without being exercised. This happens when, e.g. salt is not mixed with water. Salt's nomological tendency to dissolve in water remains its categorical property even in the absence of circumstances in which its tendency to dissolve can be exercised. In addition, tendencies can be exercised without being realized. This is the case in the natural sciences when we observe, in non-laboratory situations, falling bodies accelerating at different rates. Indeed, no falling body in open systems is observed to accelerate at a constant or the same rate. But of course this is not taken to falsify the law of falling bodies. In nature, GMs continue to act in their characteristic ways without producing the patterned outcomes observable in closed experimental systems. This is so because in nature a multiplicity of GMs combine, interact and collide such as to result in the (scientifically irrelevant) flux of phenomena of the everyday world. The realization of a natural tendency can, in other words, be offset by counteracting forces. Thus, empiricism's mistake is to fail to recognize that GMs operate independent of the effects they generate. That is, GMs endure and go on acting (in the way that experimental closure enables us to identify) in nature, i.e. in open systems, where patterned regularities do not prevail. Statements about tendencies are not equivalent, salva veritate, to statements about their effects. Laws may exist and exercise their tendencies or powers even though no Humean "constant conjunctions" are observed. (This would be the case if it happened that the practice of creating closed experimental conditions had never been engaged in, i.e. in a world without science.)

LAWS, GENERATIVE MECHANISMS AND TENDENCIES IN ECONOMICS

GMs are not confined to the natural world. Natural structures are not the only structures there are. Plainly, there are humanely constructed structures. Capitalism is one such structure. Structures of this kind, GMs, that are dynamic by nature, i.e. which are characteristically diachronic, be they natural or socially constituted, share the same ontology. This should not be confused with the radical empiricist (positivist) claim that the natural and the social sciences share the same method. Clearly they do not: closed experimental situations exist but are not typical in the social sciences. It is tempting to think that because of the absence of closed systems in social science, there can be no talk of laws there. This temptation should be resisted. Consider: tendencies produce their characteristic outcomes ceteris paribus, ie. other things being equal, i.e. ceteris absentibus, other things being absent. When we identify the tendency of a thing, we specify what will happen, as a matter of course, if interfering conditions are absent. That is the point of vacuums in the closed systems created in laboratory experiments: they permit exercised tendencies, i.e. tendencies in operation, to be realized. If we want to know what gases tend to do when acted upon by heat, we eliminate all potential counteracting forces by creating a vacuum in the chamber, so that both gas and heat can express their natures unimpeded.

Thus, implicit in both physical- and social-scientific practice is the crucial distinction between the exercise and the realization (or manifestation) of a tendency. This distinction is essential to structural analysis in economics because of the impossibility of creating the social equivalent of a vacuum in the social sciences, which deal with the open systems of everyday life, where a great many forces and tendencies collide. Accordingly, just as the law of the tendency of falling bodies to accelerate at a constant rate is not falsified by the failure of falling bodies to behave accordingly in open systems, so too, e.g., the law of the tendency of the growth of productive capacity to outpace the growth of profitable investment opportunities -the thesis of secular stagnation theory- is not undermined by the remarkable growth rates of the Golden Age. In both cases, the presence of offsetting factors prevents the structurally generated tendency from being realized or manifested. I argue that the same can be said for any putative economic law.

In social science –and this is most conspicuous in economics, the most theoretically developed of the human sciences- we compensate for the absence of experimentally closed systems by constructing their functional equivalent, which we might call, in terms redolent of Weber, an ideal-typical theoretical model. It is an unfortunate habit (perhaps a tendency in the above-elaborated sense…) of mainstream economists to employ these models as if they described the open-system observable facts of economic life. This is, I suspect, a consequence of the economic empiricist's mistake referred to above, namely to think that GMs, if they must be spoken of at all, are to be conceived as reducible to their effects. (Recall Hume's claim, inspired by his reading of Newton, to expunge all notions of "power", "generation" and "production" from his analyses.) But, as noted above, GMs in both the social and the natural sciences employ unrealistic models, i.e. models which do not pretend to offer the equivalent of a photographic representation of the world. In both natural-scientific experiments and social-scientific ideal-type models, an attempt is made to abstract from the nonessential. We seek to place the spotlight of theory on what is necessary to the situation, system or institution under investigation, and to prescind from the arbitrary and accidental. In economics we seek to identify those features of capitalism that make it what it is. This enables us to identify capitalism's distinct and characteristic tendencies, and to describe what will happen as a result of the exercise of these tendencies, ceteris absentibus.

That there are such tendencies seems to me to be uncontroversial. We all know, for example, that cyclical downturns are not mere empirical contingencies of capitalist development, but structurally generated tendencies which follow inexorably from the specific mode of organization (structure) of capitalism. And like all tendencies, their realization can be offset, as we have seen above, by counteracting factors, such as fiscal and monetary policy. Other examples would be what Marx called the tendencies of capital to concentrate and centralize. The tendency, and corresponding law, with which I will be primarily concerned in this paper is constitutive of the theory of secular stagnation, and is far more likely than the immediately foregoing examples to generate controversy. I refer to the tendency of mature capitalism to suffer from a chronic paucity of profitable industrial investment opportunities, relative to the great magnitude of its investable surplus. Let us look more closely at this tendency.

THE THEORY OF SECULAR STAGNATION

It is worth mentioning that the view that the continuous accumulation of capital is both essential to the normal development of capitalist societies and essentially self-limiting was held by virtually all of the major modern political economists, in the form of one version or another of the doctrine of the falling rate of profit. Adam Smith explained the secular decline of the profit rate by the increasing abundance of capital in a developing capitalist society. Ricardo and Mill believed that the rate of profit would be depressed by the diminishing productivity of the land which would drive up the price of wage goods and therefore of the wages of labor, and so drive down the profits of capital. Marx pointed to the increasing capital-intensity of industry and the paucity of working-class purchasing power relative to the productive capacity of the economy, as the principal threat to the profit rate. And Keynes held that in mature capitalist economies the "marginal efficiency of capital", i.e. the expected rate of return (over cost) on an additional unit of a given capital asset, would tend to decline. All these thinkers had an at least intuitive appreciation of the fact that the growth of capital tends to be terminally self-limiting.
(It is worth citing a remark of Joseph Shumpeter at this point: "Though Keynes's 'breakdown theory is quite different from Marx's, it has an important feature in common with the latter: in both theories, the breakdown is motivated by causes inherent to the working of the economic engine, not by the action of factors external to it.")

In my estimation, no one understood the underlying dynamics of the tendency to stagnation better than the Polish economist Michal Kalecki, who is known to have developed the essentials of Keynes's General Theory before Keynes himself (and to have produced far more elegant mathematical formulations thereof). Perhaps the best way to understand Kalecki's thought is to see him as having argued that certain features of a not-yet-mature industrializing economy persist after the process of industrialization has been accomplished, with the effect that the developed capitalist economy is saddled with a problem of chronic excess capacity. Let me sketch this train of thought.

In the course of their natural growth capitalist economies reach a level of industrial development characterizable as maturity, a point beyond which growth must either cease, or be sustained by exogenous (in a sense to be elucidated below) means. Straight away we are confronted with a rejection of an assumption that is implicit in mainstream neoclassical theory, viz. that both the supply and the demand curves shift, virtually automatically, to the right. On the stagnationist conceptualization of growth or development, the process of development is not everlasting, but rather is at some point accomplished. There is the period, industrialization, during which the economy is developing, and which culminates in a (finally) industrialized or developed infrastructure. At this stage there will have been built up, or "accumulated", a complement of plant and equipment in steel production, machine tools, power stations, transport systems, etc., that is capable of satisfying a level of consumption demand consistent with the moral limits of a reasonably civilized style of life, the constraints imposed by a finite fund of natural resources, and, most importantly for stagnation theory, the limited possibilities of what Marx called "expanded reproduction" imposed by the accumulation process itself.

This account point can be expanded as follows. During any period of industrialization, the growth of the capital goods industry (hereafter, following Marx, Department I, or DI) must outpace the growth of the consumption goods industries (hereafter, again following Marx, Department II, or DII). Indeed, it belongs to the nature of the process of industrialization that the demand for the output of DI cannot be a function of the behavior of consumption demand; during industrialization, investment demand is both rapid and relatively autonomous. For if the principal project is to develop the means of production, then a disproportionate share of national wealth must be devoted to investment/accumulation at the expense of consumption. Strategic capital goods such as transport and communications networks and steel mills cannot be built bit by bit. This is clear with respect to railroads (Recall Keynes's remark that "Two pyramids are better than one, and two masses for the dead better than one; but two railroads from London to York are not necessarily better than one."), but perhaps not as clear with respect to steel facilities.

Suppose 1) that the efficient production of steel requires equipment with the capacity to produce 200,000 tons of steel, and 2) that demand turns out to be for 300,000 tons. The investor has two alternatives, either to forgo an extra market or to take a chance and add another 200.000 tons. On the second alternative, the one virtually assured in a period of (rapid) industrialization, the manufacturer is left with a surplus capacity of 100,000 tons. Here we see, writ small, a crucial source of two basic tendencies of capitalist development, the unrelenting pressure to expand markets, and the tendency to overproduction of a specific kind, namely the overproduction of capital goods, the tendency to overaccumulation. Each of these tendencies is the basis of a corresponding law of economics: Wherever we find a competitive, profit-driven market economy, we must also find a system-driven tendency to expand markets, and: Wherever we find a competitive, profit-driven market economy, we must also find a system-driven tendency for the growth of productive capacity to outpace the growth of effective demand.

As we have seen, all the major classical political economists anticipated the stationary state; they all assumed that the period of development or industrialization would come to an end. Basic industries would be in place, and DI would be capable of meeting all the replacement and expansion demands of DII. Prescinding for the moment from the emergence of new industries, DI would no longer be a source of substantial expansion demand for its own output; most of DI's internal expansion demand would be extinct.

But this is not the end of the classical story. For an important strand in the thread of classical (and perhaps neoclassical) theory contains the assurance that the capitalist economy provides a mechanism that in the long run counteracts the tendency of the demand for the products of DI to peter out. As one might expect, this is the price mechanism, which brings about, in the circumstances described above, a falling rate of profit (or interest) and thereby a simultaneous check on accumulation and spur to consumption. The causal chain is simple: the fall of the profit rate would lower capital's share of national income, i.e. it would transfer income from capital to labor. Thus, the demand gap created by the sharp waning of DI's expansion demand would be made up by the increase in consumption demand, which would of course mean an expansion in the demand for the output of DII. Moreover, an immediate expansion of DII at the expense of DI in order to assure a rapid transition out of the stationary state would be entirely feasible given the adaptability of certain key industries in DI to new market conditions resulting from the newly-expanded purchasing power of the working class. The construction of new factories could, for example, yield to the construction of new homes.

The theoretical elegance of this scenario is impressive -almost inspirational- but, alas for illusions, the price mechanism does not work this way. For the above-mentioned transfer in national income from capital to labor is supposed to happen when industrialization comes to an end by virtue of its having been accomplished. But from the capitalists' perspective, it is as if nothing counts as industrialization coming to an end. New industries, for example, can create a situation functionally equivalent to industrialization. "Accumulate, accumulate, that is Moses and the prophets."

We have at this point arrived at a picture of a developed capitalist economy which is in a state of permanent industrialization. Excess capacity prevails and working-class income is stagnant or declining. Interestingly, this has in fact been the state of both the U.S. and the global economy since 1973. According to the foregoing analysis, this reflects the fact that the U.S. and global economies are now instances not merely of the exercise of the law of the tendency of mature capitalism to stagnate, but of its realization. To put it differently: these economies are now in their natural state.

But important questions immediately arise. Why are these economies in their natural state now? And if there is a structurally generated tendency for capitalist economies to stagnate, how shall we account for the historically unprecedented growth rates of the Golden Age? I have barely sketched an outline of a response to these challenges above: if there is indeed a tendency for capitalism to stagnate, then there must have been in operation during the Golden Age what I called "counteracting forces and tendencies" which had spent themselves by the mid-1970s. In the absence of new offsetting forces, the tendency to stagnate has, as we should expect, re-asserted itself. These claims require further elaboration, and it is to this task that I now turn.

SECULAR STAGNATION AND TRANSFORMATIONAL GROWTH

In order to account for the actual pattern of capitalist growth in the context of stagnation theory, we must reflect on the kind of growth required by capitalist economic arrangements. Mainstream theory does not distinguish between kinds of growth if and when it addresses the specific requirements of capitalist growth at all. This is, I believe, a serious error. I will begin by introducing the notion of transformational growth, which transforms the entire way of life of society and absorbs exceptionally large amounts of the investible surplus. My point shall be that a capitalist economy cannot sustain growth merely by producing more and more different types of widgets, in the absence of pervasive structural change. Growth sustained in the latter manner is transformational growth.

We are forced to introduce the concept of transformational growth for reasons related to my earlier discussion of the structural features of mature capitalism which generates a chronic tendency to stagnation. I will now embellish this analysis. It should be clear that capitalism cannot grow in the way in which a balloon grows: its growth cannot leave its proportions intact, i.e. such that there are no new products and no new processes of production. This is to say that a capitalist economy either undergoes transformational growth or it stagnates. The argument is as follows.

Investment expands productive capacity, which in turn requires that demand increase at the same rate as potential production. Without the required rate of demand growth, underutilization/excess capacity will discourage further investment or capital accumulation and the result will of course be stagnation. Let us not address this issue in the manner of the neoclassical economist, who seems to assume that both supply and demand curves can be counted on to perennially shift to the right (absent, of course, undue government interference). But this quaint assumption is belied by the enormous literature on the development and indispensability to capitalism of the marketing and advertising industries, which we might view as massive efforts to counteract Keynes's declining marginal propensity to consume by deliberately creating among the consuming masses a full panoply of "manufactured" consumption desires. These considerations point to the need constantly to exogenously stimulate consumption demand in order to narrow the demand gap generated by the tendency to overaccumulation. But they do not yet establish the need to generate a broad, nation-wide pattern of demand required by structural change and transformational growth.

What is needed at this point are concrete examples of the generators of transformational growth, and of exactly how these generators accomplish one of the fundamental features of transformational growth, the mobilization and coordination of the economic resources of the entire country into a grand national project which stimulates demand not merely for this and that consumption good, but for crucial commodities and institutions such as oil, steel rubber, and other primary products, and communication and transportation facilities. What this requires are what Paul Baran and Paul Sweezy termed, in their influential Monopoly Capital (Monthly Review Press, 1966), "epoch-making innovations". Edward Nell and Robert Heilbroner have characterized these same innovations as "transformative innovations". Let me approach transformative innovations by looking at the tendency to stagnation from yet another perspective, one which focuses on the role of competition as a major force behind the growth of both investment and consumption.

Competition reduces the need for investment by tending to increase both productivity and savings. Let us see how this happens. As a result of competition business is under continuous pressure to cut costs and produce more efficiently. To the extent that business succeeds in these respects, productive potential is increased. At the same time, competition also requires business to hold down wages and salaries and to pay out dividend and profit income relatively sparingly. Together, these pressures hold back both worker and capitalist consumption. The result is a tendency for productive capacity to expand faster than consumption. This means that there is no reason for investment to grow, for capital to achieve the required rate of accumulation, unless there are major pressures transforming the way people live. In the absence of such pressures, we may expect stagnation.

There are two dimensions of transformative innovations which are in fact two aspects of the same phenomenon. One dimension is solely technological, and the other points to changes in a population's entire way of life. Neither of these is part of a process of steady, balloon-like growth, nor is either automatically, or normally, generated by the fundamental capitalist dynamics identified by the mainstream textbooks. For this reason I have called the stimulus imparted by these innovations 'exogenous'. Let us look first at the technological dimension of transformative innovation.

This can be identified, after the owl of Minerva has spread its wings, by reflecting on some of the requirements of ideal-typical capitalism. Neoliberals correctly remind us that the bottom line is of course "freedom", primarily the freedom of capital to roam the world seeking markets, sources of cheap labor and investment opportunities. Microecenomic textbooks in fact tend to assume the perfect mobility of both capital and labor.

Let us focus on sources of power, which became especially important after the industrial revolution. Technological development resulted in the virtually total replacement of human and animal muscle power by inanimate sources of power, mainly water and steam. But reliance on water as a source of power places extreme limits on the mobility of capital, and hence on the possibilities of capitalist growth. Water power is site-specific, and the number of rivers and streams is limited. Moreover, the water had to be fast-running and productive facilities had to be located as far downstream as possible. And of course water power is only seasonally available. These restraints alone place an intolerable obstacle to the free and ongoing accumulation of capital. Here we find an overwhelming incentive to switch from water to steam power. This constitutes a huge stimulus to the accumulation of capital on a national scale.

Capitalism requires sources of power that are independent of nature and can be applied constantly wherever they are needed. And these are precisely what steam power made possible. It was now possible to set up productive facilities virtually anywhere; a major fetter to the accumulation of capital was removed. The universal mobility required by capital was now much more fully realized. At this point I want to emphasize that this technological /economic transformation was necessarily accompanied by profound social and cultural changes. For the steam engine's reduction of the seasonality of water power made possible a feature of work that is increasingly common on a global scale: the emergence of modern year-round work habits. With this change comes a dramatic transformation of our notions (and practices) of work and leisure, with all the consequences these have for the felt experience of everyday life. That is an instance of the second dimension of transformative innovation, i.e. its introduction of dramatic cultural changes, changes in the way populations live.

Much the same can be said for the subsequent shift to electrical power, which makes possible trolley cars, refrigerators (as opposed to what used to be called, in the U.S., "ice boxes"), ranges, toasters, radios, washing machines, fans, et al.

The railroad too is a transformative innovation par excellence. Consider the spectacular effects of railroad expansion: internal transport costs are sharply reduced; both new products and new geographical areas are brought into commercial markets; it is now possible to deliver exports to port with unprecedented efficiency, thereby encouraging the extensive development of the export sector; and impetus is provided to the development of the coal, iron and engineering industries. As with the steam engine, these technological and economic benefits wee necessarily accompanied by profound social and cultural changes. The railroads changed the way of life of the people by binding them as never before. The possibility now existed for mass production, mass consumption and indeed mass culture.

And of course the establishment of a national rail network absorbed massive amounts of investible capital, thereby spurring sustainable growth and offsetting the realization of the economic law that capitalist economies tend to stagnate. Apropos: in the latter third of the nineteenth century, railroad investment in the U.S. amounted to more than all investment in manufacturing industries.

And who can doubt that the transformative effects of the introduction of the automobile were epoch-making? The expansion of the automobile industry was the single most important force in the economic expansion of the 1920s. Car production increased threefold during this decade. (The automobile industry produced 12.7% of all manufactured output, employed 7.1% of all manufacturing workers, and paid 8.7% of all industrial wages.) Immediately after World War II the auto industry continued what was to be its breakneck expansion, and the possibilities created thereby constituted what was perhaps the most extensive transformation of the country's way of life in its history.

Consider the stimulus to capital accumulation and employment constituted by the following, each and all a consequence of the increasing automobilization of American society and culture: the migration of the population from the central city to the suburbs and exurbs (first made possible by the streetcar, before the major streetcar operations were bough and then quickly dismantled by the auto companies); the need for surfaced roads, road construction and maintenance, highway construction and maintenance (which had already accounted for 2% of GDP in 1929); the suburbanization of America, with the attendant construction of housing, schools, hospitals, workplaces, and more; the growth of shopping malls; the expansion of the credit industry; the spread of hotels and motels; and of course the growth of the tourism/travel industry. Never before had any population's way of living been transformed so profoundly in so short a period of time. And of course no one has failed to recognize that Americans' main symbol of their most precious possession, their personal freedom/liberty, is their ability to drive, solo, cars that have increasingly come to resemble tanks. Americans' liberty, embodied in the automobile, has become, literally, a commodity.

The long-term growth of the U.S. economy cannot be adequately explained or described without reference to these transformative innovations. None of these are required by the models of capital accumulation found in neoclassical, Keynesian or Marxian growth theory. After the civil war, growth in the last third of the nineteenth century was spurred primarily by the railroads. This stimulus fizzled, as railroad expansion began to slow down, around 1907, when, in spite of extensive electrification of urban (and even some rural) areas, the U.S. economy began a stretch of slow growth, which lasted until the outbreak of World War I. After the end of the War, the economy experienced a brief slump, which was followed by a period of fairly sustained expansion in the 1920s. The latter, as we have seen, was spurred mainly by the growth of the automobile industry. But the rate of growth of the automobile industry slowed down after 1926, and with it the rate of growth of almost all other manufacturing industries. And wages and employment had not risen as rapidly as production, productivity or profits.

In fact, the economic situation in the U.S. at the end of the 1920s bore a remarkable resemblance to the current economic situation in America. After 1926 overcapacity emerged in many key industries, the most significant of these being automobiles, textiles, and residential construction. Contractionary forces are cumulative: excess capacity caused business confidence to decline, with resulting cutbacks in spending on productive capacity in the consumer durables and capital goods industries. The economy was intensely unsound at the end of the 1920s, and the indications at the time were clear. Consumer demand was held down by a steadily growing inequality of income. Thus, an increasing percentage of total purchases were financed by credit in order to foster purchases of consumer durables. About seventy-five percent of all cars were sold on credit. Accordingly, both home mortgages and installment debt grew rapidly. This was the extension of a trend that had begun as early as 1922, when total personal debt began rising faster than disposable income. Thus, underconsumption and traces of excess capacity, key indicators of stagnationist forces, were in effect from the very beginning of the "roaring '20s". These tendencies became increasingly foregrounded over the course of the decade.

Excess capacity in key manufacturing industries was displacing workers from capital-intensive, technologically advanced sectors to industries relatively devoid of technological advance, i.e. service industries such as trade, finance and government. With capital unable to find sufficiently profitable investment opportunities in high-productivity industries, rampant speculative activity ensued, fostered by the growing concentration of income and therefore savings during the decade. More than two thirds of all personal savings was held by slightly over two percent of all families. The wanton optimism of the 1920s led those with substantial savings to want to get richer quickly, and with little effort. The stock market bubble that materialized at the end of the decade seemed to justify the expectations that fortunes could be made overnight in real estate and the stock market. When investors acted on these expectations, the existing bubble became bigger and hence more fragile. To those familiar with the current state of the U.S. economy, the present situation presents itself as history repeating itself -contra Marx- yet again as farce.

FROM GREAT DEPRESSION TO GOLDEN AGE TO NEOLIBERALISM

The mounting instabilities of the economy of the 1920s led to a Depression that was unresponsive to the Roosevelt administration's elevenfold increase in government spending. When U.S. entry into World War II finally brought about a resumption of growth, there was nonetheless an abiding fear among economists that once War spending ceased, the forces and tendencies that had generated the Depression might reassert themselves and exceptionally slow growth could resume. Instead, much to the surprise of many economists, American capitalism began the most sustained period of expansion in its entire history. The period from 1947 to 1973 has come to be called "The Golden Age", and appears, on the face of it, to be a fatal anomaly with respect to secular stagnation theory. After all, if the causes of the Great Depression were structural, and the exogenous stimulus provided by the War was what produced a resumption of growth, how was it possible that the economy, in the absence of powerful exogenous stimulus, exhibited an historically unprecedented period of long-term growth?

I have suggested that sustained national (as opposed to intra-national regional) growth has been engendered by the emergence of transformative innovations, and it is this kind of consideration that I believe offers the most plausible explanation both of Golden-Age expansion and of the petering out of this growth period and the resumption of (global) stagnation. Five stimuli to long-term growth were set in motion after the War, and these were for the most part exogenous in the sense indicated, and essentially limited. I will construe these stimuli as forces counteracting the tendency to stagnation. Once most of these stimuli had spent their potential, stagnationist tendencies re-asserted themselves, and overinvestment became evident once again. With profitable industrial investment opportunities in short supply, the economic surplus was invested instead in what became a vast proliferation of financial instruments. When the bubble created by this process finally burst, it was replaced with a housing bubble. Indeed a variety of bubbles, in financial assets, in housing, in credit, and a substantially overvalued dollar now threaten an historically unparalleled reassertion of the tendency to stagnation. But let us look first at the counteracting forces.

After the War, and as a result of wartime rationing, Americans had accumulated a very large fund of savings, and the time had come when these could finally be spent. This accounted for an immediate surge of consumption spending which temporarily averted the onset of recession. But the effectiveness of this source of spending was soon spent. What truly impelled the sustained growth of the Golden Age was 1) the resumption of a vast expansion of the automobile industry, and with it the stimulation of the broad range of investment and employment opportunities discussed above in connection with automobilization; 2) large-scale economic aid to Europe, which stimulated export demand; 3) a nationwide process of suburbanization, which, in tandem with the expansion of auto production, expanded significantly the demand for the output of every other major industry; 4) the emergence of what president Eisenhower christened the "military-industrial" complex, which provided additional stimulus to the industries most vulnerable to economic instability, the industries of DI, the capital goods sector; and finally 5) the steady and growing expansion of business and especially consumer credit, which in recent years has assumed elephantine proportions.

Three of these factors bear the two most important features of epoch-making innovations. The expansion of the auto industry, suburbanization, and the ever-increasing expansion and extension of credit all absorb massive amounts of investible surplus, and transform the mode of life of the entire population. In so doing they impart a massive push to the macro-growth process. The first two of these have their initial direct effect on investment. The third factor, the growing importance of credit, affects both investment and consumption, but the long-term trend of the credit industry in the U.S., evident now in hindsight, is much more significant in relation to consumption. There is now in the States a credit bubble of menacing proportions, with consumers now in debt to the tune of about107% of disposable income. The Marshall Plan (number 2 above) affected mainly and directly investment and employment, with boosts to consumption following thereupon. By the mid- to late-1970s, the employment-generating capacity of the military had declined. Washington determined, in the light of the defeat in Vietnam, that hi-tech warfare, which is of course technology- rather than labor-intensive, must replace traditional forms of subversion and aggression, in order to render less likely a repeat of the "Vietnam Syndrome."

It is worth mentioning that the military-industrial complex and the vast extension of consumer credit were what constituted what Joan Robinson called "bastard Keynesianism" in the United States. Recall that Keynes had insisted that fiscal and monetary policy were necessary but not sufficient conditions for avoiding stagnation. The tendency to stagnation could be offset for the long run only if some key industries were nationalized, and income redistributed. Nationalization would allow the State to offset lagging demand by providing cheap inputs to the private sector, thereby enabling lower prices. And redistributing income would transfer liquidity from those who had more than they could either consume or invest to those whose consumption demand was severely constrained.

American policymakers saw it as their challenge to reap the effects of nationalization and redistribution without actually nationalizing industries or redistributing income. The solution was ingenious: the military-industrial complex would be the functional equivalent of state-owned industries, and would, as noted above, stimulate the demand for the output of those very firms that produced capital goods. And the extension of consumer credit would allow working people to mortgage future years' incomes and spend more without a corresponding increase in either their private or their social wage.

As mentioned earlier, these forces counteracting the tendency to stagnation were all inherently limited and temporary. By the late 1960s, the automobile industry had achieved maturity, suburbanization had been accomplished, and aid to Europe had not only long ended, but had apparently created for America the economic equivalent of Frankenstein's monster. Europe and Japan were now formidable threats to U.S. economic hegemony. (Germany, for example, has overtaken the U.S. as an exporter of capital goods.) These three colossal absorbers of surplus were now no longer in operation. In the mid-1960s social spending had overtaken military spending as the larger share of government spending. And credit had begun to function as a supplement to declining real income, rather than a further addition to growing income.

These combined developments rendered the post-War counters to the realization of the tendency to stagnation obsolete. The result was the onset of stagnation not only in the U.S. but also worldwide. In America there has been overcapacity in autos, steel, shipbuilding and petrochemicals since the mid- to late-1970s.

This general picture is widely reflected in the business press. Business Week noted that "..supply outpaces demand everywhere, sending prices lower, eroding corporate profits and increasing layoffs" (Jan. 25, 1999, p. 118). The former chairman of General Electric claimed that "..there is excess capacity in almost every industry" (The New York Times, Nov. 16, 1997, p. 3). The Wall Street Journal noted that "..from cashmere to blue jeans, silver jewelry to aluminum cans, the world is in oversupply" (Nov. 30, 1998, p. A17). And The Economist fretted that " the gap between sales and capacity is "at its widest since the 1930s" (Feb. 20, 1999, p. 15). At this time excess capacity in steel is exceeding twenty percent, in autos it has fluctuated around 30%. And these figures look good in comparison to unused capacity numbers in the "industries of the future" of the "New Economy", semiconductors and telecommunications. Not long ago, ninety-seven percent of fibre optic capacity was idle.

MAINSTREAM ECONOMICS AND STAGNATION THEORY

Let us begin with the indisputable fact that the regime of neoliberalism has brought with it a substantial decline in economic growth. The most widely cited study on this issue, produced for the IECD by Angus Maddison, shows that the annual rate of growth of real global GDP fell from 4.9% in 1950-1973 to 3 % in 1973-1998, a drop of 39 %. Theoretical commitments can guide perception: neoliberal economists either denied or ignored the decline in global growth because of their reliance on Say's Law, that it is not possible for total demand to fall below full-capacity supply over the long run. In my earlier remarks I offered an explanation of sluggish growth rates since 1973. Many orthodox economics have done something similar: they have offered explanations of the initial rise in excess capacity. But what has not been explained is why global supply did not eventually adjust itself to the slower rate of demand growth, with the result that in the mid-1970s the global economy would enter a period of sluggish expansion. And it is worth mentioning that even Keynesian macro-theory is inadequate in this regard. It assumes that slow growth in aggregate demand will result in a proportionate decline in the growth of aggregate supply through its effect upon investment and therefore productivity.

An adequate explanation of the sustained character of excess capacity can be constructed from insights from Schumpeter, Marx and the contemporary economist James Crotty. The analysis that follows should be understood within the framework of the version of secular stagnation theory sketched above.

Before the shift to neoliberal policies by Jimmy Carter, Reagan and Thatcher, the global economy was already subject to downward pressures on demand growth resulting from two oil price shocks and the restrictive macro policy imposed in response to oil-price induced inflation. These impediments to demand growth were exacerbated by neoliberal policies. In combination, these forces led to a sharp rise in excess capacity in globally competing industries. At the same time competitive pressures were further intensified by the reduction of the market power of national oligopolies caused by the removal of protectionist barriers to the free movement of goods and money across national boundaries. Accordingly, competitive pressures between nations rose dramatically. In this context, normal stagnationist tendencies operated to further constrain global demand growth and further reproduce industrial capacity faster than either neoclassical or Keynesian theory could comprehend.

The Achilles Heel of neoclassical theory with respect to its inability to account for the persistence of overcapacity during the neoliberal period is its account of competition. So-called "perfect competition" is alleged to lead to maximum efficiency and the elimination of excess capacity. This claim appears inconsistent with the history of real-world, pre- and post-oligopolistic competition. Textbook-like competition has led to periodic market gluts or overproduction crises, price wars, plummeting profits, unbearable debt burdens and violent labor relations. Neoclassical theory banishes these demons with the aid of two assumptions which appear designed explicitly to make them impossible. The first assumption claims that production cost per unit rises rapidly as output increases, and the second that exit from low-profit industries is free or costless. If these assumptions were indeed true, then pure competition could not be shown to have stagnation- or depression-inducing effects. But these assumptions are, I shall suggest, false.

I will begin with the least plausible of these two assumptions. It states that there is free or costless exit from low-profit industries. But productive assets are typically immobile or irreversible, i.e., they are not liquid, and this forces a sizeable loss in the value of a firm's capital should it choose to leave an unprofitable industry. Whether they are sold on a second-hand market or reallocated to a different industry, productive assets will lose substantial value. Capital flowing out of the aerospace industry has been found to sell for one third of its replacement cost. Insolvent telecom firms in the U.S. have sold their assets for 20 cents on the dollar. And isn't this what one would expect? For it is usually poor profit prospects and/or great excess capacity that heighten a firm's incentive to leave an industry. But it is precisely those circumstances which deeply depress the price of industry-specific assets on the second-hand market, since the supply of these assets grows even as the demand for them has collapsed.

Before I turn to the slightly more plausible (yet still false) assumption -that unit production cost rises dramatically as output increases- I will outline the corollary of neoclassical theory itself which neoclassical economists seek to evade by introducing this assumption. The theory tells us that pure competition will force price down until it covers marginal cost. Now if unit production cost remained constant irrespective of the output level, then marginal production cost and average production cost per unit would be equal. When perfect competition forces price to equal marginal cost, total revenue will be equal to total production cost. But in this case there will be no revenue left over either to pay the "fixed" cost of maintaining capital stock in the face of depreciation or obsolescence, or to pay interest and/or dividends to investors. Thus, perfect competition is seen to cause the representative firm to suffer, in each production period, a loss that is equal to fixed costs. Keeping in mind that most important global industries have huge fixed costs, no industry could long survive the consequences of intense competition.

We seem to have found a tendency to stagnation or complete system breakdown where we would least expect to find it - in neoclassical theory itself. But the theory claims to have a response to this embarrassment. It simply denies the claim that appears to entail the undesired consequence, namely the claim that unit production cost remains constant no matter what the output level. Armed now with the (false) assumption that unit production cost rises rapidly as production increases, the conclusion is drawn that marginal cost and price are greater than average unit production cost. Thus, in equilibrium, the gap between price and average production cost is sufficiently large to cover all fixed costs. Let competition be as fierce as you wish, the typical firm will not lose money. Voila!

I have claimed that each of the rescuing assumptions discussed above is false. What would realistic assumptions about marginal cost and the reversibility of invested capital look like? To answer this question we must recognize the distinctive character of the dominant industries of global trade and investment. These industries include steel, autos, aircraft, shipbuilding, petrochemicals, consumer durables, electronics, semiconductors and banking. Studies of this type of industry suggest that marginal cost does not typically rise with output, with the rare exception of cases when the industry is producing near full capacity output. Marginal cost behaves as we would expect in cases of economies of scale: it remains constant or declines as capacity utilization rises. It follows that if free competition forces price to equal marginal cost in these industries, we should count on an ensuing wave of bankruptcies. Here again we see that neoclassical theory, corrected for unrealistic assumptions, seems to commit us to conceptualize mature capitalism as subject to the law of an inherent tendency to stagnation or worse.

The issue I am focusing on here turns on the dynamics of unrestricted competition among oligopolies in the context of economies of scale. The importance of economies of scale underscores the crucial similarity of all the dominant industries, including the new information-technology and telecommunications (ITC) industries. I stress this point because influential neoclassical economists have wanted to claim a significant difference, with respect to overcapacity problems, between the ITC industries and the other dominant industries. For purposes of explaining the persistence of excess capacity under neoliberalism, we want to remember that as scale economies grow, marginal costs fall as fixed costs per unit rise. Thus, the greater the economies of scale, the more destructive becomes the marginal cost pricing required by intense competition. With this in mind, we can more easily see that 1) these dynamics in especially conspicuous operation in the ITC industries, and 2) that such differences as there are between ITC and the other dominant oligopolies are insignificant for the analysis of secular stagnation theory, and of capitalist growth in general.

The key issue right now, recall, is the highly destructive consequences of the tendency of free competition among dominant industries to force price to equal marginal cost. That this is the case is easier to see in the ITC sector than in the other dominant industries. This is because in ITC marginal cost is often close to zero. Producing another copy of software or adding another customer to eBay is virtually costless. This has led many mainstream economists to argue that ITC industries are exempt from the laws of the neoclassical theory of perfect competition. Since ITC firms have marginal costs much lower than their large fixed costs, the argument goes, the possession of at least temporary monopoly power is the only guarantee of an incentive to produce anything at all. Without monopoly pricing power prices will be competed down to marginal cost and fixed costs will be unable to be covered. Thus, the motor of the "new economy" is said to be the constant pursuit of monopoly power. But, contrary to the neoclassical claim, none of this distinguishes significantly between ITC and other key industries. The drive to monopoly power is characteristic of all large corporations in the present age.

As Paul Sweezy argued in his Marshall Lectures, the typical firm in an oligopolized industry strives to be a monopolist. Each firm does this individually, and they all do it collectively. Individual firms seek monopoly status through the sales effort, where the firm's product is put forth as the best in the industry and as different from all the others. Firms within the same industry seek to approach monopoly status by collusion with respect to pricing policy, especially by agreeing to refrain from cutthroat price competition. For reasons developed at length above, therefore, all dominant firms, whether old- or new-economy operations, will tend to achieve monopoly status and to be chronically saddled with excess capacity.

A SCANDALOUSLY BRIEF LOOK AT SLOW-GROWTH CAPITALISM

We are in the midst of another unparalleled period of historical capitalism. Since the onset of stagnation, the median wage in the States has not changed at all for the vast majority of wage workers. Over the past six quarters the gowth of wage income has been negative. A brief sketch of the state of the U.S. economy toward the end of last year highlights features whose most plausible explanation may lie in the fact of secular stagnation. If stagnation theory is accurate, what follows is precisely what we would expect to find. The current state of the U.S. and the global economy is best understood, I believe, against the background too briefly elaborated above. Here is a picture of the U.S. economy today.
The key to a healthy economy is job- and income-creating investment in capital goods, which in turn generates a virtuous cycle of further growth in investment, jobs and income. Ominously, the investment, growth, employment and income pictures are unprecedentedly dismal.

Compared to cyclical recoveries between 1949 and 1973, recoveries during the neoliberal period have been weak. Indeed, one or two of the post-1973 upturns has been weaker than some downturns during the Golden Age. Since the stock market collapse of four years ago, the situation has worsened. Growth rates since 2000 have been half their previous average. Even this weak performance required historically unprecedented fiscal and monetary stimulus: 13 rate cuts, three tax cuts, massive government deficits and record growth in money and credit.

Official figures mask the economy's most serious problems. Growth figures are annualized by U.S. statisticians. Thus, the much-touted 7.1% growth rate in the third quarter of 2003 was the one that would emerge after twelve months if the current trend were to continue. The same growth rate would have been reported in the eurozone as 1.8%. This is an uncommonly weak performance.

Investment data are equally misleading. Since the mid-1990s the Bureau of Economic Analysis (BEA) has adjusted upward actual business dollar outlays on computers and related equipment to take into account quality improvements (faster processors, bigger hard drives, more memory). BEA calls this "hedonic adjustment." Accordingly, the BEA estimates that business high-tech investment quadrupled between 1996 and 2002, from $70.9 to $283.7. But in actual dollars spent, the increase was only from $70.9 billion to $74.2 billion, very low by historic standards. The high-tech boom was both greatly exaggerated and misleading. After all, neither profits nor wages are taken in "hedonically adjusted" dollars.

The difference between real and hedonic outlays explains what would otherwise be a paradoxical feature of the years 2000-2003: government was reporting big increases in high-tech investment, while manufacturers were bemoaning declining sales.

Hedonic pricing has accounted for a steadily rising percentage of all reported capital investment. But if we look at actual dollars spent, we find that since 1998 the growth rate of business fixed investment has actually been declining. Real capital investment has in fact not been this weak since the Great Depression.

The fudging of investment figures also obscures the sorry state of the jobs market. The Commerce Department's figures on nonresidential investment for the third and fourth quarters of 2003 reported increases of, respectively, 12.8 and 9.6%. A closer look reveals that the "adjusted" hi-tech sector is the only bright spot, with production and capacity rising, respectively, 24.6% and 11.1% over the past year. But hi-tech is not where significant jobs increases are found. Employment in hi-tech has declined steadily through the so-called "recovery" since its 2001 peak.

In non-hi-tech manufacturing, where investment figures are not adjusted, production from January 2003 to January 2004 rose only 0.9%, while capacity actually declined -0.2%. This represents a record nineteen-straight-month decline in mainline manufacturing capacity. Since it is mainline manufacturing which employs almost 95% of all manufacturing workers, it comes as no surprise that for the first time since the Great Depression the economy has gone more than three years without creating any jobs.

The jobs crisis is even worse than it appears. Here again statistical sleight-of-hand, this time by the Bureau of Labor Statistics (BLS), obscures economic reality. Based on data gathered employing the "net birth/death adjustment," BLS announced in April, 2004, that the long-awaited jobs recovery had finally arrived. Nonfarm payrolls had allegedly surged by a whopping 308,000 in March, 2004. The birth/death model uses business deaths to "impute" employment from business births. Thus, as more businesses fail, more new jobs are imputed to have materialized through business births. This improbable statistical artefact accounts for about half of the reported 308,000 March, 2004 payroll increase.

The birth/death model is based on statistics covering 1998-2002. This was a period of explosive telecom and dot.com startups, quite unlike today's flat economic landscape. Thus, two thirds of the 947,000 new jobs BLS "imputed" for March-May, 2004, were never actually counted by BLS and never reported by any firm.

BlS's household and establishment surveys tell a more sobering story. March employment by private industry actually fell by 175,000, and the number of self-employed workers declined by 288,000. Without the simultaneous increase of 439,000 government jobs, the March job announcement would have been a calamity. And both average weekly hours and total hours worked declined markedly, even as (according to the dubious birth/death findings) the work force increased. This is the first time in U.S. history that net job growth has been negative 26 months into a recovery.

The wage and salary picture has also set grim records. During the current recovery, wage and salary growth has actually been negative, at -0.6%, in contrast to the average increase of 7.2% characteristic of this point into each of the other eight post-War recoveries. In fact, median family income in the post-War period exhibits an ominous trend. From 1947 to 1967, real median family income rose by 75%. But since 1967, it has grown by only 30%.

Labor's losses have been capital's gain: since the peak of the last recovery, in the first quarter of 2001, corporate profits have risen 62.2%, compared to the average of 13.9% at the same point in the last eight recoveries. Never in American history has any recorded recovery had such a lopsided balance in the distribution of income gains between labor and capital.

Given the dismal investment, wage/salary and employment pictures, how has it been possible for consumption to have risen to 71% of GDP in the early nineties, from its prior post-War average of 66%? The answer is a growth rate of consumer debt never seen before in America. For the first time ever, in March 2001, overall debt levels (mortgage debt plus consumer debt, mainly credit card debt and car loans) rose above annual disposable income. And from 2001 to 2004 consumer debt rose from 101% to 116% of disposable income. In the first half of 2004, consumer borrowing has been at its highest ever. It has declined slightly in the meantime. So has consumer spending. Should Americans decide to significantly increase their saving and service debts, while lowering correspondingly their consumption expenditures, the global economy could experience a major disruption.

Up until very recently, consumers had stepped up their borrowing to compensate for slowing income growth. Thus, such growth as the U.S. has experienced in recent years has been almost entirely consumption- and debt-driven. More fundamentally, it has been bubble-driven, fueled principally by bubbles in home values and credit.

Since the collapse of stock market/hi-tech bubbles in 2001, the illusory "wealth effect" has been sustained, and consumer spending thereby encouraged, by another bubble, the enormous inflation of house prices. The biggest increase in household debt came from home mortgage debt, especially home mortgage refinancing. With mortgage rates low and home prices rising, households' home equity ballooned. Bloated home equity then provided rising collateral to underwrite still more borrowing.

What makes this especially problematic is that over the last ten years, the average family has suffered under large increases in health premiums, housing costs, tuition fees and child care costs. As a result, households' and individuals' margin of protection against insolvency has dramatically declined. Filings for personal bankruptcy are approaching a record high.

There are indications that these weaknesses and imbalances in the economy are reaching a critical mass. The mortgage refi boom has fizzled, and consumer spending is beginning to decline. Two years ago the Fed's quarterly Beige Book reported a disturbing shift in the composition of credit spending: more and more families are using their credit cards to finance spending on essentials, such as food and energy.

It is no exaggeration to say that both the U.S. economy and the global economy are hugely dependent on the American consumer's increasing willingness to spend more than (s)he makes. (Imported goods have been a rising proportion of all goods purchased here.) Thus, a decline in U.S. consumer spending portends further declines in investment, jobs and income. From January to July of 2004, consumer spending rose at an annual rate of 2.8%, down from 3.3% in 2003 and 3.1 % in 2002. For perspective, during the boom years 1999-2000, growth rates were 5.1% and 4.7%.

Spending on consumer durables is the most significant indicator of healthy growth, and the drastically lower spending in this area is cause for alarm: spending for consumer durables was down to $23.5 billion in the first seven months of this year, in contrast to $71 billion on 2003 and $58 billion in 2002.

Should consumer spending continue to decline, the economy faces the genuine likelihood of a severe recession. Of course not a single American politician addresses this issue.

What is required is a shift from bubble-, debt-, and consumption-driven growth to investment- and income-driven growth. This in turn necessitates a decline in Americas principal export, jobs. Domestic job growth, a higher minimum wage, tax cuts aimed predominantly at low- and middle-income families, a sharp reduction in defense spending and a redirection of these funds to long-neglected and pressing social needs such as health care reform, the provision of universal pre-school, and across-the-board repair and upgrading of America's deteriorated infrastructure of roads, highways,tunnels and bridges, all these should be at the forefront of a Democratic administration's agenda. The restoration of infrastructure is especially labor intensive, and would generate an enormous number of productive jobs. And as a national project spearheaded by government initiative, government would emerge as a major employer.

All this si entirely incompatible with the overwhelming neoliberal bent of even the most "liberal" political leaders. It was after all Bill Clinton who urinated on the grave of Franklin Roosevelt when he proclaimed "the end of welfare as we know it".

As unfashionable as it is to suggest such a thing at a conference of economists, the only hope for the world's majority seems to be the revival of the kinds of mass movements witnessed here in May of 1968, and throughout the world during the 1960s. And time may be short.

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Alan Nasser is Professor emeritus of Political Economy and Philosophy at The Evergreen State College. His book, The “New Normal”: Persistent Austerity, Declining Democracy and the Globalization of Resistance will be published by Pluto Press in 2013. If you would like to be notified when the book is released, please send a request to nassera@evergreen.edu